Spain prepares more austerity, protesters battle police

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A demonstrator struggles with Spanish National Police riot officers outside the the Spanish parliament in Madrid September 25, 2012. Protesters clashed with police in Spain's capital on Tuesday as the government prepares a new round of unpopular austerity measures for the 2013 budget that will be announced on Thursday.

Analysis & Opinion

MADRID (Reuters) - Protesters clashed with police in Spain's capital on Tuesday as the government prepared a new round of unpopular austerity measures for the 2013 budget to be announced on Thursday.

Thousands gathered in Neptune plaza, a few meters from El Prado museum in central Madrid, where they formed a human chain around parliament, surrounded by barricades, police trucks and more than 1,500 police in riot gear.

Police fired rubber bullets and beat protesters with truncheons, first as protesters were trying to tear down barriers and later to clear the square. The police said at least 22 people had been arrested and at least 32 injured, including four policemen.

As lawmakers started to leave the parliament shortly after 2100 GMT in official cars or by foot, a few hundred people were still demonstrating in front of the building. Most dispersed shortly afterwards.

The protest, promoted over the Internet by different activist groups, was younger and more rowdy than recent marches called by labor unions. Protesters said they were fed up with cuts to public salaries and health and education.

"My annual salary has dropped by 8,000 euros and if it falls much further I won't be able to make ends meet," said Luis Rodriguez, 36, a firefighter who joined the protest. He said he was considering leaving Spain to find a better quality of life.

With this year's budget deficit target looking untenable, the conservative government is now looking at such things as cuts in inflation-linked pensions, taxes on stock transactions, "green taxes" on emissions or eliminating tax breaks.

The 2013 budget is the second conservative Prime Minister Mariano Rajoy has had to pass since he took office in December. Spain must persuade its European partners that it can cut the budget shortfall by more than 60 billion euros by 2014.

Rajoy has already passed spending cuts and tax hikes worth slightly more than that over the next two years, but half-year figures show the 2012 deficit target slipping from view as tax income forecasts will not be hit due to economic contraction.

He said earlier this month the 2013 budget would cut spending further in all areas of government apart from pensions and borrowing costs.

Spain is at the center of the euro zone debt crisis on concerns the government cannot control its finances and those of highly indebted regions, bitten by a second recession since 2009 which has put one in four workers out of a job.

REGIONAL TENSION

On the regional front, Catalonia, which generates about 20 percent of the national output, announced on Tuesday it would hold early elections on November 25 after its call for more tax autonomy was rejected last week by Rajoy.

Political uncertainty in cash-strapped Catalonia, along with an announcement from southern region Andalucia it might seek a 4.9 billion-euro credit line from the central government, will pile more pressure on Madrid to seek European aid.

Rajoy is holding back from applying for help, which would activate a European Central Bank bond-buying programme and bring down Spain's punishing debt premiums.

With the threat of the plan alone reducing 10-year yields by around 2 percentage points, the cautious leader, known for keeping his cards close to his chest, is playing for time.

Rajoy says he is mulling the conditions of a bailout application, but suspicion that he may wait until after regional elections on October 21 pushed short-term yields higher at auction on Tuesday.

The government is also expected on Thursday or Friday to set a fresh timetable for economic reforms, seen as an attempt to pre-empt strict EU-imposed conditions for aid.

"Let us in, we want to evict you," protesters chanted outside parliament. The number of home evictions has soared as thousands of people have defaulted on mortgage loans.

Demonstrators said they were angry that the state has poured funds into crumbling banks while it is cutting social benefits.

"We're protesting against the cuts. I've had to give up my apartment," said Ondina, a 30-year-old fine arts graduate who is without a job. She said she could not survive on unemployment benefit of 260 euros ($340) a month.

RUNNING OUT OF OPTIONS

Half-year deficit data indicate national accounts are already on a slope that will drive Spain into a bailout. The deficit to end-June stands at over 4.3 percent of gross domestic product, including transfers to bailed out banks, making meeting the 6.3 percent target by the end of the year almost impossible.

On Tuesday, the treasury ministry said the central government deficit to end-August had reached 4.77 percent of GDP, already above its year-end target of 4.5 percent of GDP.

"It's going to be difficult keeping the deficit to around 2 percent in the second half, when the first half was closer to 4 percent, especially since traditionally, the second half deficit is higher than the first," said Juan Ignacio Conde-Ruiz, economist at Madrid's Complutense University.

For 2012, the measures aim to reap savings of over 13 billion euros, but economists see the deficit missing the target by almost 1 percentage points, implying further saving needs of up to 10 billion euros for this year alone.

Rajoy has been careful to highlight the importance of next year's deficit target of 4.5 percent of GDP though any shortfall this year will weigh on 2013's accounts. After slashing civil servants' wages, raising value added tax and cutting health and education spending, Rajoy is running out of options.